Unusual Options Activity Review: DNDN, CERN, LVLT, SE, AM, UA, SM, HERO, VIX, IYR

Friday's Bullish Trading
Dendreon (DNDN) sees relative strength and increasing volume late-Friday. The stock is up 18 cents to $4.81 in active trading of 12 million shares after Aetna said it was expanding coverage to include Dendreon's Provenge cancer drug. Options on DNDN are seeing brisk trading as well. About 16,000 calls and 2,000 puts, a ratio of 8-to-1 and more than 3X the daily options volume for the biotech. Weekly (9/28) $5 calls on the stock are 4 percent out-of-the-money and expiring after today. More than 3,400 contracts traded. Weekly (next week) and October 5 calls are the next most actives. Players are possibly taking positions in $5 calls on DNDN on the view today's news will continue to lift the stock in the days/weeks ahead. October options expire in three weeks.

Bullish trading was also seen in Cerner (CERN), Level 3 (LVLT), and Sempra Energy (SE).

Friday's Bearish Trading
American Greetings (AM) saw increasing put activity today. Shares of the greetings card company are down 19 cents to $16.82 late-Friday after the company reported a second quarter loss of 13 cents per share. The Street was expecting an 11-cent per share loss. The stock ticked lower on the news and one player bought 15,000 January 15 puts on the stock today for 45 cents per contract. By way of comparison, average daily options volume on the ticker (puts and calls) is only 75 contracts. Yet, today, 15,134 Jan 15 puts traded on the stock against just 191 in open interest. The stock saw a 17.3 percent pop a few days ago on news two company executives have made an offer to take the company private. So, today's unusual put buying might be to hedge the gains and the deal news in American Greeting earlier this week.

Bearish trading was also seen in Under Armour (UA), SM Energy (SM), and Hercules Offshore (HERO).

Index Recap
CBOE Volatility Index (.VIX) added .76 points to 15.50 and trading in the VIX pit was busy Friday, with 409,000 calls and 109,000 puts traded on the index today. The top trades were part of complex four-way spread after one investor sold 16,000 November 26 calls on VIX and sold 16,000 November 27 calls to buy 33,000 December 18 puts and 33,000 January 25 calls. In other words, upside November calls were sold to buy a hefty December 18 – January 25 strangle on the volatility index. The investor is possibly rolling a position out to the Dec 18 – Jan 25 strangle from November calls and/or they expect VIX to remain low through the November expiration, but then see increasing volatility from that point forward. The index was up today, but slid 9.3 percent during the third quarter.

Analyzing the ETF Market
iShares Dow Jones Real Estate Fund (IYR), which is an ETF that holds a basket of Real Estate Investment Trusts (REITs) and real estate companies, lost 15 cents to $64.38 and an interesting spread is initiated in the product today. An investor apparently bought 7,500 December 66 puts on IYR for $3.05 and sold 15,000 December 57 puts at 36 cents. In other words, a Dec 66 – 57 (1X2) put ratio spread was bought on IYR for $2.33. Volume is exceeding open interest in both contracts. So this looks like a new position. If so, the investor is positioning for a move lower in the sector because the best payoff from the spread happens if shares fall to $57 through the expiration, which represents a decline of 11.5 percent during the next 84 days.

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About Joseph Cusick

Joseph Cusick currently serves as the Senior Vice President of Education and a Senior Market Analyst for optionsXpress. Mr. Cusick seeks out common sense and technologically scalable educational pathways for self-directed investors of all experience levels. He is largely responsible for ramping up delivery of online and offline seminars to customers and potential clients worldwide. Prior to serving in his current role, Mr. Cusick immersed himself in the broker side of optionsXpress by managing his own book of business. Prior to joining optionsXpress, Mr. Cusick served as a market maker and portfolio manager at the Chicago Board of Options Exchange. Joseph is a graduate of Marquette University and holds his Series 4, 7 and 63 registrations with FINRA.